Libertarian Paternalism

Paternalistic: influencing choices in a way that will make the choosers better off, as judged by themselves.

“Drawing on some well-established findings in social science, we show that in many cases, individuals make pretty bad decisions.”

Nudges

Nudge: any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.

Humans Vs Econs

To qualify as Econs, people are not required to make perfect forecasts, but they are required to make unbiased forecasts. That is, the forecasts can be wrong, but they can’t be systematically wrong in a predictable direction.

Status quo bias: importance of the default option

A nudge is a factor that significantly influences the behavior of Humans, even though it would be ignored by Econs.

By properly deploying both incentives and nudges, we can improve our ability to improve people’s lives, and help solve many of society’s major problems.

Choice architecture in action

“Sometimes the choice architecture is highly visible, and consumers and employers are much pleased by it. (The iPod and the iPhone are good examples because not only are they elegantly styles, but it is also easy for the user to get the devices to do what they want.)”

If incentives and nudges replace requirements and bans, government will be both smaller and more modest.

Biases and blunder

Rules of thumb

Anchoring: People anchor their perception of something new to something they know well (i.e.: size of city anchored on their city, or the closest known city). Usually ends up with large differences

Availability: Remembering a recent occurence makes it more likely it people’s mind

Representativeness: How likely it could fit in a previously known classification. Looking for patterns where there may not be some.

Optimism and overconfidence

Bad things are less likely to happen, especially to the individual in question. Good things are more likely to happen to the individual

Gains and Losses

We are loss averse. Losing hurts more than winning helps.

Status Quo Bias

Intertia and less likely to change from the default.

Framing

We are really affected by how information is framed. 90% of success looks much better than 10% of failure.

So what?

The combination of these biases and basic tenet of human perception means we are imminently nudgeable, sometimes to a worrying degree.

Temptation

Mindless choosing

Putting yourself in auto-pilot

Self-control strategies

Based on social norms, loss aversion or other tools, we make it so that defaulting to the auto-pilot is more “painful” than the effort of actively making a decision.

Mental accounting

Relying on artificial classification in our heads can lead to less than perfect decision-making and resource usage.

Following the herd

Social influences comes in two categories:

Information: being made aware of what others are doing.

Peer pressure: following the pressure (real or imagined) of going with the crowd

Doing what others do

In a group setting, individuals influence each other willingly or not and end up with a shared view point that may not reflect each individual’s.

This viewpoint is often more ardently defended than any individual’s own, as “WE came to the conclusion that…”

The spotlight effect

We think others make painstaking efforts to analyse everything we do, when in reality, they most likely don’t care or notice those details.

Cultural change, Political change, and Unpredictability

We are swayed by the majority opinion, which is often just the result of a snowball effect. What wins in the end may not be the best, but the first, or the one first talked about.

When we’re told something is happening, we’re more likely to notice that it is, without the environment changing or actually bearing that fact.

Social nudges as choice architecture

Saying a majority are already doing the desired behaviour may be enough, framed the right way.

Boomerang effect: telling people about the average will often lead their behaviours to go towards the average, when, in some cases, that is not the desired effect.

To overcome it, a clear signal must be sent to those who are doing better than expected that they need not change their behaviours (such as a smilie).

Priming and anchoring

It can temporarily sway perception and lead to a more likely manifestation of the desired behaviour.

Asking people if they intend to do something increases the odds. Further asking when they intend to do something has a bigger effect.

When are nudges needed?

“[P]eople most need a good nudge for choices that have delayed effects, those that are difficult, infrequent, and offer poor feedback; and those for which the relation between choice and experience is ambiguous.”

Benefits and costs are not concurrent

When benefits and costs are not co-occuring, Humans tend to heavily discount the value of future events and have a bias towards the present.

Degree of difficulty

Lacking a technological solution to a difficult decision means a nudge is more likely to be helpful to unstick the thinking process.

Frequency

Rare decisions are hard to get used to and “train for”. A nudge is more likely to be helpful in those cases.

Feedback

Effects of the decision must be obvious and linked, otherwise, a nudge may be needed to overcome the disconnect.

Knowing what you like

Given a completely new experience that doesn’t relate to past experience, a nudge may be helpful in guiding towards a likely option.

Are market forces sufficient?

Most of the time, competition ensures that price serves as a good signal for quality.

Irrational consumers don’t alter the market as long as they do not predominate. If they do, the market will be severely altered.

For irrational consumers to be protected, there must be competition.

“If consumer have a less than fully rational belief, firms often have more incentive to cater to that belief than to eradicate it.”

Choice Architecture

Defaults

Ubiquitous, powerful, and unavoidable.

Expect error

Human make mistakes, the system must account for it.

Give feedback

Learning doesn’t happen without it.

Understanding “Mappings”

Put it into terms that can actually be understood by Humans dealing with the decision.

Structure complex choices

We focus on key attributes given a very complex task.

Incentives

Often essential to drive the point home and keep the ecosystem more balanced.

Information must be salient for Humans to pick up on it, and remember it.